From the rebound of key hotel performance metrics to the potential return of group demand and international travel, the U.S. hotel industry could take its first steps on a long road to recovery in 2021.
NASHVILLE, Tennessee—After the events of 2020, quite a bit of the near-term hotel industry outlook is decidedly better, which is not hard to imagine. But just like with all recoveries, the outlook varies by class, location and customer type.
As 2021 begins, here are some of the forces that will govern the U.S. hotel industry in the coming year.
1. RevPAR growth will be the strongest ever recorded
After the catastrophic U.S. hotel performance results in April, when revenue per available room declined by 80%, monthly results have gotten if not better, then at least less bad. For the full-year 2020, the STR forecast stands at just barely above a 50% decline. These are numbers and experiences you tell your grandkids about.
The great news of at least three vaccines that were developed in record time—in warp speed, to coin a phrase—has the collective global hotel industry breathing a sigh of relief. But if we learned one thing from the summer of 2020, it is that the American consumers were still called to travel, vaccine or not, travel restrictions in place or not, CDC warnings or not. And that trend helped with results in July and August, but likely will also lead to continued increases in COVID-19 cases.
After a stronger-than-expected summer season, what has been missing in the weeks after Labor Day was any real sign of corporate group or transient demand returning. The coming vaccines make that demand rebound much more likely a little later in 2021. So, STR predicts that room demand will be a quarter higher than it was in 2020 and that RevPAR will grow by over 30%, the single strongest RevPAR growth year ever recorded by STR (the prior peak was +8.6% in 2005).
2. ADR growth will be anemic—or will it?
As we have previously reported, average daily rate recoveries are never “V-shaped” and so the sharp ADR deterioration of around 21% this year will likely not be made up quickly. Indeed, STR projects ADR growth of just over 5% in 2021 and likely the same or a more subdued pace going forward.
What this implies, then, is that the absolute level of 2019 ADR will not be reached for a while. In fact, our five-year projection horizon does not actually show a return to the 2019 levels, but if you follow the projected path, a recovery in 2025 seems likely—we just don’t project that far out right now.
Now, what could be an upside scenario for the 2021 ADR growth? Follow me along in this thought exercise: As vaccines are more widely distributed—first to vulnerable populations but then in the early summer to the healthier populations that make up most business travelers—room demand will pick up.
As summer starts, Americans will continue to take to the beaches and national parks, just like in 2020. But then after Labor Day business travel could start again in earnest and we could also see some corporate group travel return.
And here is where the upside could come in: We have all heard about group meetings being postponed from Q3 or Q4 2020 into 2021. Let’s assume that meetings planners are more confident with stronger attendance numbers after Labor Day and hence quite a few meetings will be pushed into Q3 2021.
Suddenly, we have a scenario that the corporate transient traveler will return to hotels which are already pretty full of meeting attendees. A possible outcome of this could be higher transient ADRs. Right now, this just a thought exercise, but I think in this environment it is worth keeping an eye on the downside risk as well as the upside potential.
3. The ‘in construction’ pipeline will contract
It takes a lot of conviction in the best of time to take on a new hotel construction project and these are not those times.
Indeed, we estimate that the number of rooms in construction will decline sharply over the next few years as pricing and RevPAR performance makes it hard to underwrite projects. It is likely that the projects that are currently in the pipeline, all 213,000 rooms of them, will actually move forward and, with little exception, will open. But projects that are in the planning or final planning stages will probably get some extra scrutiny by developers and lenders and may not move as quickly as once hoped.
When we look at the previous recession, it is obvious that the number of rooms in construction peaked right before the recession hit and then declined over the next three-and-a-half years or so. To expect a similar pattern between 2021 and 2023 is not a far reach at all. Those new projects that will start will likely be predominantly limited-service hotels, just like they have been in last few years.
4. US group demand will finally return
News of a vaccine has dominated the news and has, temporarily, lifted the stocks of public U.S. hotel companies. The expectation is clear: If enough business travelers get a vaccine, they can get back on the road, attend conferences and make deals. In addition, one thing that the prolonged work-from-home period has shown is that, yes, knowledge workers can be productive, but the micro interactions that really make up the workplace and build culture, the often invoked “water cooler conversation,” can only be had one-on-one and not via a scheduled video call.
I am in the middle of onboarding a geographically diverse team and pre-pandemic everyone would have flown to a central location for training, but also—just as important—share dinners and have conversations outside of the classroom. Now this all is happening online, and the knowledge transfer is certainly easily achievable. But the lack of personal interaction is a hindrance to building team culture and something that we will rectify as soon as possible. I am sure I am not alone in this urge to return to the road to forge team camaraderie and cohesion.
This pent-up corporate group demand will lift occupancies for full-service hotels and provide much needed relief for owners. It was good to see that the most recent segmentation data shows that group demand is indeed not totally gone and over 1 million group rooms were sold in each of the last three months. Those million or so group rooms were likely leisure and association groups with a little corporate demand sprinkled in here or there. But it is clear that the industry needs to sell many, many more group rooms to see a recovery. With a vaccine in play, operators can finally start thinking about just that.
5. International arrival numbers will continue to be subdued
One trend we observed in the summer of 2020 was that regional travel in each country picked up notably. With mandatory quarantine rules in effect, international travelers thought long and hard about going overseas and in some instances travel bans reduced foreign travelers to zero.
Another factor that impacted travel, especially on the leisure side, was likely psychological. With so many things in flux and the rules and regulations around “who was allowed to do what” differing from country to country, consumers likely felt more comfortable staying closer to home surrounded by their own people—at least in their own country, surrounded by their own language and where everyone had a similar set of pandemic restrictions.
As the vaccine is administered around the globe, it will be interesting to observe at what pace the international visitation numbers will increase. As data from U.S. Travel shows, the non-resident arrivals did not decrease completely, but declined from multiple million to just multiple thousands. Between April and October, the visitor count has increased over tenfold, but even now is only around 10% of what it was in January.
It is hard to come up with a scenario in which the international travel count will reaccelerate with force in 2021. On the one hand, video calls have kept international teams close and productive. International travel was always an expensive proposition but was chalked up to “the cost of doing business.” I think that cost will be more scrutinized in the quarters to come.
In addition, the U.S. government response to the virus and the subsequent case counts have likely put a damper on travel enthusiasm to visit the U.S. Having a vaccine will help counter that, but there will likely be many countries where vaccine distribution is not as rapid as in first-world countries, therefore hampering global travel flows.
There will be much to cheer in 2021 as the U.S. hotel industry starts its recovery. But the road to better results will be uneven and will include some starts and stops. The more we all prepare for that reality, the better we will cope with the year ahead.
Jan Freitag is the SVP of Lodging Insights at STR and National Director for Hospitality Market Analytics at CoStar.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.